Why the U.S. has higher drug prices than other countries

And how a Trump administration proposal to lower costs does little to address the underlying problems

Spending on pharmaceuticals is on the rise worldwide. And it well should be. Today, we are able to cure some diseases like hepatitis C that were virtual death sentences just a few years ago. This progress required significant investments by governments and private companies alike. Unquestionably, the world is better off for it.

At the same time, the United States also pays significantly higher prices than the rest of the developed world when it comes to prescription drugs, due primarily to limited competition among drug companies.

These two problems are well-known to policymakers, consumers and scholars alike. The Trump administration’s recent proposal seeks to lower costs by restructuring drug discounts that occur between pharmaceutical companies, health insurers and entities called pharmacy benefit managers.

But in my view as a health policy scholar, the plan does little to address the underlying problems of prescription drugs in the U.S. I believe the U.S. can refocus its regulatory approach to pharmaceuticals, adapted from the one used in Europe, to better connect the value prescription drugs provide and their price.

Lacking even rudimentary price controls, U.S. consumers bore the full brunt of the expensive development work that goes into new drugs. These costs were further augmented by marketing expenditures and profit seeking by all entities within the pharmaceutical supply chain. Consumers in Europe, where there are government-controlled checks on prices, were not as exposed to those high costs.

Additionally, the overall complexity of the U.S. health care system and the lack of transparency in the drug supply chain system create conditions favorable to limited competition and price maximization.

TRUMP'S PROPOSED FIXES

The consequences of pricey pharmaceuticals are significant in terms of costs and diminished health. Close to 20 percent of adults report skipping medications because they are concerned about costs. Nonetheless, the U.S. may be spending close to $500 billion annually.

The way I see it, there are three major issues inherent in negotiating discounts for drugs.

For one, true negotiations would only take place if Medicare or any other entity was willing to walk away from certain drugs if no discounts could be obtained. In a country that heavily values choice, and where such activities would become a political football, this is highly unlikely.

Moreover, it would only work for drugs where viable alternatives are available. After all, most Americans would likely be hesitant to exclude a drug, even at high costs, when no alternative cure exists.

Yet even if some version of a discount program were to be implemented more widely, such a program does not change the underlying pricing or market dynamics. Crucially, relying on discounts does nothing to reduce list prices set by manufacturers. Pharmaceutical companies and all other entities in the supply chain remain free to set prices, bring products to the market, and take advantage of loopholes to maximize corporate profits.

Ultimately, pharmaceutical companies and all other entities involved in the pharmaceutical supply chain are unlikely to be willing to simply give up profits. Quite likely, steeper discounts for Medicaid and Medicare may lead to higher costs for employer-sponsored plans.

FOCUSING ON EFFECTIVENESS AND CONSUMER INFO

The question then emerges: What could be done to truly improve the twin issues of high costs and limited cost-effectiveness when comes to pharmaceuticals in the U.S. health care system?

While Americans are often hesitant to learn from other countries, looking to Europe when it comes to pharmaceuticals holds much promise. Countries like Britain and Germany have taken extensive steps to introduce assessments of cost-effectiveness into their health care systems, refusing to pay higher prices for new drugs that do not improve effectiveness of treatment over existing options.

Since reforming its system in the early 2010s, Germany has allowed manufacturers to freely set prices for a limited period when bringing new drugs to the market. It then uses the data available from that period for a nongovernmental and nonprofit research body to evaluate the benefit provided by the new drug, as compared to existing alternatives. This added benefit, or lack thereof, then serves as the foundation for price negotiations between drug manufacturers and health plans.

Lacking the corporatist nature of the Germany economy, the U.S. should resort to a bottom-up approach focused on investing in assessing and subsequent publicizing of cost-effectiveness data as well as cost-benefit analyses for all drugs. In order to minimize politicization, these analyses would be best handled by one or multiple independent research institutes.

Ultimately, knowing what drugs provide what value would equally benefit consumers, providers, and payers, and serve as a meaningful first step towards connecting the prices we pay for prescriptions to the value we derive from them.

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